India’s New Defense Investment Policy Disappoints

Indian commerce minister Anand Sharma announced the raising of the country’s cap on foreign direct investment (FDI) in 13 important industrial sectors, including defense. But while the defense industry was expecting the cap to be raised to 49 percent from the present 26 percent, Sharma said that defense proposals for more than 26 percent will be permitted only for state-of-the art technology. The Cabinet Committee on Security (CCS), a body that decides on matters of national security, will consider any proposals “on a case-by-case basis.” Because “state-of-the-art” products were not defined, it falls to the Ministry of Defense to make the decision, said Sharma.

“So what’s new? This is a classic case of pulling wool over eyes to show India has made changes to its policy. Joint ventures over 26 percent already exist in India, including the 51- to 49 percent Roltas-Thales [joint venture] for command, control, communications, computers, intelligence, surveillance, target acquisition and reconnaissance information systems, and the 50.5- to 49.5 percent Brahmos, a [joint venture] between Defense Research and Development organization [DRDO] and Russia’s Military Industrial Consortium, NPO Mashinostroyenia,” a defense OEM told AIN on condition of anonymity.

While the MoD is clearly looking at acquiring high technology, the transfer of that technology has remained a roadblock for foreign investors concerned about intellectual property rights. They have lobbied for the increase from 26 percent to ensure they get some board control and enable them to get almost half the return on their investment. The Indian MoD has resisted this with a few exceptions, citing security concerns.

Many proposed joint ventures, including EADS/LT&S and BAE/Mahindra, have been rejected in the past following no clear definition of the policy. Sharma’s announcement does not appear to have changed that. L.K. Behera, a researcher at the Delhi-based Institute for Defense Studies and Analyses, said that the Indian MoD “has created a climate of uncertainty as foreign investors are clueless about the basis on which the MoD will determine the merit of each and every foreign investment inflow. The uncertainty is also due to the perception that the MoD seeks to protect its own enterprises vis-à-vis the private sector, which is likely to derive greater benefit from FDI.”